US Treasury debt prices jumped for a second straight day on Wednesday, after a tame reading of consumer prices bolstered views that the Federal Reserve will not raise interest rates next month.
Benchmark yields dropped to four-month lows after core consumer prices, an inflation gauge that strips out food and energy costs, rose 0.2 percent in July, ending a four-month string of 0.3 percent increases, suggesting that underlying price pressures may be easing.
The easing inflation rate, along with data suggesting US economic growth was slowing, raised the likelihood in investors' eyes that the Fed may have ended its two-year campaign of raising interest rates.
Treasuries with longer dated maturities saw their yields fall by more than those with shorter maturities.
"The market has been waiting for data to confirm the Fed's forecast that economic growth is slow enough to keep inflation under control," said Jane Caron, chief economic strategist at Dwight Asset Management, in Burlington, Vermont.
"If you combine yesterday's PPI, and today's CPI, and the drop in building permits and weaker-than-expected manufacturing production, bond bulls found what they were looking for," Caron added.
Overall the Consumer Price Index rose 4.1 percent in July year, down a rise of 4.3 percent for the June year.
Fed funds futures on the Chicago Board of Trade on Wednesday pointed to a 24 percent chance of a Fed interest rate rise next month, down from a 30 percent chance prior to the release of the consumer price data.
However, in a speech on Wednesday Dallas Fed President Richard Fisher emphasised the need to be vigilant in the face of inflation, which he said was still the greatest risk to the US economy.
Fed policy-makers last raised the fed funds target rate in June, the 17th such increase since mid-2004, but decided to hold rates steady in their last meeting on August 8.
Benchmark 10-year notes were trading 16/32 higher in price for a yield of 4.87 percent, the lowest since early April, from 4.94 percent late on Tuesday.
Some analysts saw the potential for more gains in bond prices, with the next likely target for the 10-year yield being its 200-day moving average, around 4.79 percent. Even the risk of a rebound in yields does not deter some bond investors.
"We think that with the recent movement down to 4.87 percent on the 10-year yield, we can see that back up again, but we would be invested," said Andy Richman, managing director and fixed-income strategist with SunTrust bank, in West Palm Beach, Florida.
"We are slightly bullish on the market," said Richman, who works for the personal asset management division of the bank, which manages about $8 billion of fixed income.
The jump in US Treasury prices was supported by data showing the pace of US home building fell more than expected last month, and by weaker than expected industrial production, pointing to a slowing US economy.
Two-year notes were trading 4/32 higher in price to yield 4.88 percent from 4.95 percent late on Tuesday, while 5-year notes were 10/32 higher for a yield of 4.81 percent from 4.88 percent.
Thirty-year bonds were 24/32 higher in price for a yield of 5.00 percent from 5.05 percent.